As a former Executive Director of the World Bank I know that the columnists of the Financial Times have more voice than what I ever had, and therefore they might need some checks-and-balances.
Currently, having probably trampled some delicate ego, I am a persona non grata at FT.
Would the child shouting out “the Emperor is naked” have his observation published in FT? Would the child now need a PhD for that?

For more see "A Blog is Born" at the very bottom.

January 31, 2013

Sir, I come from an oil-cursed nation where when there is an oil boom, our government becomes almost independently wealthy, and we the citizens become almost a nuisance to it, except for during Election Day, and this even though that oil income rightfully belongs to us. And in many ways something similar happens with corporate taxes.

All corporate taxes will, no doubt, at the end of the day, one way or another, be paid by a citizen somewhere, most probably in a very regressive way. And that citizen payment will occur without the governments being held accountable to the citizen, allowing instead the citizen’s tax-paying-representation powers to be exercised by the corporations.

Therefore, when I read well argued articles like John Gapper’s “Politicians should stop posturing on corporate tax” January 31, I can only sadly conclude thinking “what brilliant distractions the politicians sponsor in order to keep us citizens away” so as to be allowed to be lobbied, in petit committee, by corporate interests.

Also, when corporations pay taxes on behalf of the not so blissfully ignorant citizens, this can quite often be an extremely regressive taxation, since the final tax bill might hit, one way or another, someone earning absolutely nothing.

Of course, a zero corporate tax would imply that all investment income had to be taxed at the same level as all other income.

And so… down with corporate taxes! The only ones who have the right to cover for a government expenses are the citizens and that right should not be diluted in any way.

PS. This is not the moment, but if you have time, I would refer you to My Tax Paradise.

January 30, 2013

Sometimes I like to peek at sites with an “Under construction” sign to have a look at how things go. Nowadays one can also get a look of “Under distortion” market sites, like thanks to Tracy Alloway’s and Nicole Bullock’s “Banksoffer debt product to help skirt new liquidity rules” January 30.

Sir, John Plender is absolutely correct when he writes “the excessive exposure of banks to government debt market creates serious systemic risk. And when the central banks stop buying it is a safe bet that few private sector investors will be prepared to step into their shoes at anything like today’s rate”, “Central Bank hot air pumped up the bond bubble” January 30.

But he is not right blaming that bubble solely on the central banks since, as I have been protesting for over a decade now, that bubble is also inflated by the silly low capital requirements banks need to hold when lending, for instance, to “infallible sovereigns”.

Unfortunately, when he writes that the Basel Committee method is “to penalise uncleared swaps with higher capital charges… in most cases rightly so”, and therefore just wants to exclude the foreign exchange swaps, he shows not having understood the fundamental mistake of current regulations, and which is that, when you penalise some you are de facto favoring others, and so de facto distorting.

If regulators are concerned, for instance with the risk of uncleared derivatives, it is one thing for them to order the bank to increase the capital it holds against all not risk weighted assets, let us say from 6 to 6.2 percent, and quite another, to target specific assets with a higher capital requirements. The first adjusts the capital to the overall risk level of that banks activity, the second just distorts and discriminates against what the regulator perceives is risky.

Sir, you know that I hold that regulators with their capital requirements for banks, manipulated the relative risk-adjusted return on bank equity to be much higher for what was officially perceived as absolutely safe, than for what was perceived as risky. That, pushing the banks to hold excessive exposures to some of “The infallible” that later turned out to be fallible, and against holding minuscule capital, was the prime cause for the crisis. That, reducing the incentives for the banks to lend to “The Risky”, those actors who on the margin are the most important for the real economy, is hindering the recovery.

But, that said, what I wanted to comment on today is the ease with which so many, like Wolf, use the concept of interest spreads between “yields on sovereign bonds of vulnerable eurozone sovereigns and those on German Bunds” to point in some direction, without adjusting for changes in the base rate. For instance is a 2 percent spread when the base rate is 3 percent, higher than a 1 percent spread when the base rate is 1 percent? As I see it, not really, in the first case there is a 66 percent difference, in the second 100 percent. Interest rate spreads, as most in life, is quite often not something absolute but something relative.

And then he describes and analyzes some suggestion of McKinsey on how banks should confront this change. Strangely enough I do not see this change of return in bank equity viewed from the perspective of a change in its risk profile, or the suggestion of “go get yourselves a new class of shareholders”.

If the 7 percent on equity bank returns are perceived to derive from a much safer operation there is no reason why bank division currently valued at 60 percent of their book value by investors in search of big returns, could not be valued at least at one time book value by pension funds, insurance companies and widows or orphans in search of more stability.

In fact the real economy would probably very much welcome the banks becoming less of the biggest beneficiary of it.

That said the best way forward to rebuild the banks though, is for the regulators to trust banks and immediately stop interfering with what banks do, by means of imposing capital requirements, and now also liquidity requirements, which are based on an ex ante perceived risk, and mostly as perceived by others, the credit rating agencies.

In fact there is a high voltage electrified wall or fence that needs to be taken down. And I refer to the one which imposes on banks much higher capital requirements on exposures to “The Risky” than to exposures to “The Infallible”. That wall has forced the banks to avoid having relations with for example small and medium businesses and entrepreneurs, and instead indulge in relations with “The Infallible”, to such a degree that we can notice evidence of clear degenerative incest, now especially between the banks and the infallible sovereigns.

Tyrie mentions the bank's lobbying strength, and this can indeed be a big problem. But it would be much more useful if he helps those without a voice, those already being correctly discriminated against by the banks, "The Risky", not having also to be discriminated against by bank regulators. As is "The Risky" those actors who on the margin are the most important for the real economy, get much less access to bank credit and have to pay much more interest rates only because of these regulations. Mr. Tyrie help to tear down that wall!

PS. Anyone building a wall must always be aware of that he might end up on the wrong side of it. In this case, bank regulators ended up on the side of "The Infallible", precisely those who always cause a bank crisis, because as they should have known those perceived as "The Risky" never do.

January 26, 2013

An entrepreneur or a small or medium sized business, if there were no bank regulations could have been offered a loan $400.000 loan at 7%, but now, only because they are regulated with Basel Committee criteria, the banks will only offer $200.000 at 10%.

But why should Gillian Tett care about the commoner, “The Risky” when she once again can enjoy being surrounded in Davos by the financial aristocracy “The Infallible” and “The Regulators”? Frankly she should be ashamed of herself writing “Davos elite take note: the public don’t trust you” January 26 when she, as a journalist in one of the most important financial papers, has so blithely ignored the topic of how regulators, without explaining themselves, and much less being held accountable to anyone for what they do, distort and discriminate.

Let me remind her again that the Mario Draghi that now presides her European Central Bank is the same regulator who presiding the Financial Stability Board thought, and perhaps he even still thinks so, that it was perfectly correct to allow a bank to leverage its equity 62.5 times to 1 when lending to Greece, but only 12.5 times to 1 when lending to “The Risky”.

January 25, 2013

Sir, Kara Scannell and Shannon Bond quote David Keller saying about Mary Jo White, recently nominated by Obama to the Securities and Exchange Commission that “She is driven by her sense of what’s right”, "White nominated to lead Wall St watchdog” January 25.

I just hope then that Mary Jo White understands that regulatory discrimination in favor of “The Infallible” those already favored by markets and banks, and against “The Risky” those already discriminated against by markets and banks is, besides stupid, utterly wrong, I would even say truly odious.

January 24, 2013

Sir, Chris Giles, in “Why Sir Mervyn has taken a walk on the supply side” January 24, considers going for more “supply side” economics and abandoning “demand side” stimulus as something “too defeatist. Frankly, he has no idea of what real defeatism is.

Mark Twain said “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”. The capital requirements for banks based on perceived risk imposed by the Basel Committee's bank regulators only makes real sure that bankers will be ever so more anxious to lend you the umbrella when the sun is shining, and immensely faster to demand its return, as soon there is the slightest indication that it could possibly rain.

And that my friend, that is defeatism you really can write home about.

January 23, 2013

Sir, if I would turn a blind eye to the fact that the interest rates the US pays on its government debt is subsidized by means of generating for the banks much lower capital requirements than for all other bank lending, then I would in general terms agree with Martin Wolf’s “America’s fiscal policy is not in crisis”, January 23.

But I do not turn a blind eye to the insidious and not so transparent regulatory discrimination which is making all bank borrowings much more expensive for all the “risky”, those who act on the margins of the real economy and those who are indispensable in order to generate tomorrow’s jobs, tomorrows fiscal revenues, and, why not, tomorrows “absolutely not risky” borrowers.

And neither do I turn a blind eye to the fact that the artificial “zero interest rates”, though of course a blessing for the government of turn, is creating big earning holes elsewhere in the economy, which will catch up on us all sooner or later.

This of course does not stop me from agreeing 100 percent with Wolf on the need for sensible reforms that contains the costs of the health sector, before the reforms called for might be truly insensible to the needs of the citizens.

PS. Since the US public debt is often used as an approximation for the risk-free rate, you should notice that what is believed to be the “risk-free-rate” is actually the “risk-free rate minus the subsidies provided by discriminatory bank regulations”. And so the reading of one of the most important instruments when trying to navigate our economies is completely wrong… and, for the record, that has a cost too.

January 22, 2013

Sir, you title your editorial about Obama’s second inauguration as “The audacity of experience” January 22. Sorry but I do not think that “audacity” is a concept that could currently be used in the context of describing the US (or Europe for that matter)

Look at the following three quotes from Obama’s speech:

“Together we discovered that a free market only thrives when there are rules to ensure competition and fair play.”

“Our celebration of initiative and enterprise, our insistence on hard work and personal responsibility, these are constants in our character.”

“America’s possibilities are limitless, for we possess all the qualities that this world without boundaries demands: youth and drive, diversity and openness, of endless capacity for risk and a gift for reinvention”

And then explain to me how on earth “free market”, “ensure competition and fair play”, “celebration of initiative and enterprises” and “endless capacity for risk”, can exist in a country where its banks are ordered to hold more capital when lending to “The Risky” than when lending to “The Infallible”?

No way Jose! Our nations, or at least our banks, are currently ruled by risk-adverse baby boomers that really do not care one iota for promoting “The Infallible” of tomorrow by taking the necessary chances on “The Risky” of today.

Our governments, or at least our bank regulators, are loudly shouting out “aprės nous le deluge”, and unfortunately our young are too busy to take notice. They will pay dearly for it.

Sir there is no question Lawrence Summers' recommendations for increased investments by the US Government is based on the government´s capacity for borrowing “at near-zero real rates of interest”, “End the damaging obsession with the budget deficit” January 22.

But why is he unable to see the real present danger in that the government is being able to borrow “at near-zero real rates of interest”? Is that something natural? Is that healthy? Of course not!

If the banks had to, as they should, hold just as much capital when lending to a “risky” citizen than when lending to “the infallible” government, then the current interest rate on US government debt, often the approximation of the “risk-free rate”, would be higher, as it would not have the benefit of this regulatory subsidy.

It is only if the regulatory taxing of “The Risky”, which subsidizes “The Infallible” is eliminated in the US, "The Home of the Brave", that its economy can start breathing freely again and grow sturdy... and this, of course, goes for Europe too.

Is Mishkin really sure about that? Last time I looked the Basel Committee for Banking Supervision, on top of the capital requirements for banks based on perceived risks, and as perceived fundamentally by credit rating agencies, and which remain firmly entrenched, are now adding a layer of liquidity requirements also based on perceived risks, and also as fundamentally perceived by credit rating agencies.

When are our utterly naïve regulators going to wake up to the fact that in banking it is what is perceived as safe which can cause most risk since what is perceived as risky takes perfectly care of itself?

January 18, 2013

But following all those would not suffice, unless Italy immediately stops following what the Basel Committee predicates in terms of subsidizing “The Infallible” and taxing “The Risky”, and which is precisely what their capital requirements for banks based on perceived risk does.

For Italy to “improve competitiveness and increase its growth potential” what it cannot do, is to make the access harder than needs be for their “risky” small businesses and entrepreneurs.

That of course goes for all other Basel bank regulation countries too!

Sir, Sir Samuel Brittan ends his “Britain has a funny way of firing up the locomotive” of January 18 with “Keynes…was up against the self-destructive instincts of political leaders, who transferred home truths about family budgets to wrong-headed principles for running national economies.”

Indeed, just as I am up in arms against the self-destructive instincts of bank regulators, and who transfer home truths about individual risk avoidance into wrong-headed principles for our banks.

Sir, again, for the umpteenth time, if you know all bank crises have been caused by excessive exposures to some erroneously classified as absolutely safe, why on earth, as Basel regulations require, need banks to hold much more capital when lending to “The Risky” than when lending to The Infallible?

It is any risk-taking austerity that most causes a nation to stall and fall. The willingness to take risks that is the true locomotive of an economy. And that is precisely why we go to our churches to pay “God make us daring!” while ignoring that some besserwisser regulators have kept themselves busy castrating our banks.

Sir, in “Seeking high yields” subtitled “Central bankers should manage risk where it matters most” January 18 you write: “Macroprudential regulation…should ensure that the system is not put at risk by animal spirits. This function is not best-served by generic warnings against risk. There is nothing wrong with individual risk-taking if it does not threaten the system.”

Sir, have you ever seen a more generic warning against risk than what is imbedded in the capital requirements for banks based on ex-ante perceived risk?

Sir, how many times must I remind you of the fact that individual risk-taking never really threatens a system? Only a collective risk avoidance, that expresses itself in excessive exposures to what was ex-ante considered as absolutely safe but that ex posts morphs into being very risky does that.

Sir, again, for the umpteenth time, if you know that all bank crises have been caused by excessive lending to some of “The Infallible”, why on earth need banks to hold more capital when lending to “The Risky”, and as Basel regulations predicate?

“Central bankers should manage risk where it matters most”, indeed, and that is primarily where it is perceived to be absolutely safe!

January 16, 2013

Forget it, real debt turbulence is still ahead of Germany. With bank regulations that so outlandishly favor what is perceived as absolutely not risky, the safe-haven Germany will become dangerously overpopulated with debt, sooner or later, one way or another. Just like the AAA rated securities collateralized with mortgages to the subprime sector in the US, or just like Greece.

Sir, Kate Burgess and Caroline Binham reports on how the bankers’ “own trade body, British Banking Association, this week called for an independent board to monitor and uphold professional standards in the industry.”, “BBA sets out plans for monitoring of standards” January 16.

Nothing wrong with that but if there are some who really need to review their standards, that is the bank regulators. Any independent review of what they are doing would surely come up with many recommendations and among which I would foremost identify the following:

1. Before regulating the banks the regulators should define the purpose of the banks.

2. Before setting up capital requirements for banks based on perceived risks, the regulators should look at all the empirical evidence out there so as to understand that what is really risky for banks is not what is perceived risky but what is perceived as absolutely safe.

3. When regulating, do no harm, like distorting the banks utmost important function of efficiently allocating economic resources.

Those simple principles, if they had been applied by the regulators, would have saved the banks and us from the current crisis.

Since these were not followed, we ended up with banks having obese exposures against what was perceived as absolutely safe but that ended up to be very risky; and anorexic exposures to those risky small businesses and entrepreneurs who on the margins are the most important actors in the real economy.

Sir your “Regulators should take on kid gloves” January 16 ends with: “The world economy was broken by banks’ cavalier attitude to risk and rules. When authorities suspect outright wrongdoing, a final finding for or against guilty conduct must be sought. Anything less is an insult to the public’s intelligence on top of the injury inflicted on their livelihoods”.

No! The world economy was broken by the regulator’s foolishly believing that they could drive out risk from banking by setting up different capital requirements depending on the perceived risk of the asset,blithely ignoring that the perceived risks are already cleared for by the interest rates, the size of the exposures and other terms.

By favoring so much what is perceived as absolutely not risky they have our banks drowning in exposures to precisely what has always caused the big crises, namely the absolutely-not-risky-turned-very-risky, while at the same time they are making it much more difficult for those perceived as risky, many of whom could be our absolutely not risky of tomorrow, to access the bank credit they need today.

And what do you call capital requirements which allowed banks to leverage their equity 62.5 times to 1 when investing in securities that are blessed with an AA to AAA rating, or when lending to Greece? Is that not a truly “cavalier attitude to risk”?

And is not, as Basel II decrees, allowing banks to lend to their sovereign against zero capital while requiring them to hold 8 percent when lending to an unrated or not so good rated citizen, just an odious discrimination in favor of the State and against the citizen?

You at FT must be well aware of my seriously argued criticism of the Basel Committee’s regulatory paradigm, and you must also have noticed that my questions have not even been acknowledged and much less given answer from any regulator.

If I find current regulations to be utterly crazy and dangerous and therefore the authorities engaged in wrongdoings, is it not my civic duty to denounce that? Why should I as FT seems to do, keep silence and protect the bank regulators?

Does this mean that I condone the wrongdoing of bankers? Of course not! And you know that.

January 15, 2013

Sir, Stephen Foley in “Outlook unchanged” January 15 writes: “Rating agencies’ outsized role in the credit crisis is well known. By validating the transformation of subprime mortgages into triple A-rated securities, based on mistaken assumptions about the US housing market, they contributed to the infection of the global financial system.”

Indeed, but the only reason why the credit rating agencies detonated the crisis, was the “outsized role” loony bank regulators assigned them, when with their Basel II they allowed banks to hold only 1.6 percent in capital, meaning a mindboggling authorized bank leverage of 62.5 times to 1, only because a human fallible rating agencies deemed a security to be of AAA quality.

That, as I have so many time explained to you increased the demand for these securities so dramatically that the market, as usually happens, when it ran out of well awarded mortgages, produced bad ones which ended up in some AAA Potemkin rated securities.

I dare you to answer: When has a bank or a bank regulator most problems, when a bad rating turns out to be correct, or when a good ex-ante rating ex post ends up being incorrect? It is clearly the second. And so explain to me why you think we should allow our regulators to bet our whole bank system on the credit ratings to be correct?

In January 2003 in FT you published a letter I wrote and where I said “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”.

Sincerely, FT, should be ashamed of yourself feeding the illusion that if we can only get the credit ratings agencies to be better at what they do, then our banks can bet their (and ours) last shirt on the credit ratings.

Foley also writes “attempts to strip credit ratings of their central role in financial regulation are proving complicated”. But that is only so because regulators foolishly hang on to the idea that, by means of capital requirements for banks based on perceived risk, they can play risk managers to the world. I swear to you, the world cannot afford such hubris.

Also, again, for the umpteenth time, FT, if banks clear for the information provided in credit ratings by means of interest rate, size of exposure and other terms… why the hell should they clear for that same information in the capital requirements too?

January 14, 2013

In it Mr. Boman recounts that having been offered some triple-A rated mortgage backed securities by some US investments banks, Handelsbanken executives, led by him, visited the bankers in New York and asked to see the underlying documentation of the mortgages. And when that proved not to be possible, he went to the west coast and visited some of the houses used in the bonds, and from which he reached the conclusion of “it was very clearly nothing for us”.

Yes clearly that was a great job by Mr. Boman and he should be commended for having doubted. But that said it would be very interesting hearing his opinions on the following:

When presented with operations which involve triple-A ratings, at what size of potential exposure and to what extent of additional not recoverable research costs, is a banker supposed to doubt the validity of the credit ratings?

If it is possible to doubt the quality of the ratings what does that say about the quality of the regulators who with Basel II allowed banks to hold those same securities Boman so wisely rejected, against only 1.6 percent in capital, and thereby allowing bank equity to leverage 62.5 times to 1.

And if a bank discovers great reasons to doubt a credit rating, what is their responsibility in terms of communicating their doubts to the market and to the regulators?

And what is a bank to do if the doubting also extends to the supposedly infallible sovereigns... the paymasters of its regulator?

January 13, 2013

Sir, Gillian Tett discusses the possible writing on the wall of the art of handwriting in “Beyond the quill: why handwriting’s era might be over”, January 12. In my book Voice and Noise, 2006, I also included a piece on the same subject titled “To write or not to write … by hand”.

I bring this up because some years ago I pointed out the following two benefits that might have been overseen by Ms Tett.

William Easterly in his book The Elusive Quest for Growth, argued that “the productivity gains of the computer are slow to be realized . . . because there are still too many traditional people out there with ink and paper,” and so perhaps even prohibiting handwriting in schools could have some very beneficial environmental effects.

In relation to the need for new good paying jobs, limiting the teaching of writing would allow us to visualize in only a couple of years the resurrection of the profession of writing clerks…. highly regarded and well paid scribents.

Sir, Brooke Masters reports that the Basel Committee for Banking Supervision has decided to allow “a broader variety of assets, including some equities and all investment grade corporate bonds” to count as part of the liquidity banks will require to have; and she titles it “Basel Committee relaxes liquidity rules for banks” January 12.

Though the title is technically correct, no doubt, an alternative title would be “Basel Committee tightens the rules on those they do not want banks to lend to”. And that title would be much more significant, since it would directly address one of the most destructive consequences of the Basel Committee’s bank regulations, namely that by giving preferences to “The Infallible” they are odiously discriminating against “The Risky”, and who are, acting on the margin, often the most important actors of the real economy.

January 11, 2013

Sir, Gillian Tett draws four quadrants by on one axis showing the private sector in a credit boom, and the public sector stimulating, and on the other axis the private sector deleveraging and the public sector also deleveraging, going for austerity, trying to rein in any inflation threats.

And this tool makes it easy to understand that it is only in the quadrant where both the private sector and the public sector are deleveraging that the risk of a liquidity trap and deflation exists, and so, when there both “monetary policy and fiscal expansion must be stimulative, since loose money alone will not work”. And this Ms Tett does in “It’s time to embrace a new mental map of central banks” January 11.

Absolutely! But using the same methodology, and in this case including on one axis what is ex-ante perceived as absolutely safe, and what is perceived as risky, and on the other axis what ex-post turns out to be safe, and what turns out to be risky, one should also be able to understand that it is only the quadrant containing what was ex-ante perceived as absolutely safe and that ex-post turned out to be risky, that poses any major threat to the banks.

And therefore one could conclude in that capital requirements for banks like the current ones, higher for what is perceived as risky and lower for what is perceived as absolutely safe, make no sense whatsoever and only distorts.

And so again, for the umpteenth time, let me repeat that it really doesn’t matter if you select the absolute correct fiscal and monetary policy if at the same time, by using loony and distortive bank regulations, you are going to impede these to work.

Sir, Mary Watkins and Ralph Atkins title their report on the Basel regulators allowing “highly rated…securities backed by mortgages on homes to be included in liquidity buffers that banks will have to hold”, as “Mortgage-backed securities come in from the cold” January 11.

Has everyone already forgotten that it was precisely that kind of regulations, the allowing of absurd low capital requirements for this type of highly rated securities that set us up for the current crisis? And now the regulators want to send these securities back to the ovens, even increasing the temperature by adding the liquidity requirements based on perceived risk? Sincerely the regulators remain as loony as back in June 2004 when they launched their Basel II!

And, again, where do the regulators get to think they are authorized to send those who because they are perceived as “The Risky” already find themselves in the cold, into extreme arctic colds? Can’t they understand that “The Risky”, the unrated or the not- so-good-rated small and medium business and entrepreneurs, are those we most need to care for and nurture when the real economy goes through difficult times? Sincerely, in the name of all those who will not be able to find employment because of these regulations…Damn the regulators!

January 10, 2013

Sir, “Bankers have become too arrogant and the industry must change”, that is what Andrea Orcel, the chief executive of UBS told the UK Parliamentary Commission on Banking, and as reported by Patrick Jenkins and Lina Saigol in“UBS chief calls on arrogant bankers to change”, January 10.

Of course there are arrogant bankers, and I have met quite a few of them in my time, and not only lately. But that said, in terms of arrogance, they all come a long distance second from those who think it naturally for them to be the risk-managers for the whole world.

And I refer of course to the regulators who, by way of the Basel Committee and the Financial Stability Board (ex-Forum), designed capital requirements for banks based on the perceived risks of the different bank assets, and as if that perceived risk had not already been cleared for in terms of interest rates, amounts of exposures and terms.

It was their arrogance, and their self-sufficiency, which caused the current crisis in which banks found themselves saddled with excessive exposures to what was erroneously perceived as absolutely not risky, “The Infallible” and we, the real economy, suffering growing difficulties to satisfy the credit needs of the unrated, or the not- so-good-rated, small and medium business and entrepreneurs, and this only because regulators foolishly believe “The Risky” to be risky for the banks.

And still five years after the 2007-08 crisis that should have opened their eyes, they arrogantly, now with Basel III, trot along the same proven wrong road of Basel II as if nothing happened. That Sir, well that’s some real arrogance to write home about.

But in that respect, I also need to remind you again, for the umpteenth time, that the Basel Committee for Banking Supervision also carries out a censorship, by means of their decree Basel II, which is equally or even more ridiculous, and, for the world at large, especially for the Western world, much more dangerous than China’s.

Basel´s censorship is clearly more subtle than China´s. Still, it includes giving to some officially designated agents, the credit rating agencies, special prerogatives by which they can influence the market, like allowing for sublime small capital requirements for bank when they engage “The Infallible”, while punishing, severely, with immensely larger capital requirements, those banks that dare lend to “The Risky”, those not favored by the regulatory establishment.

And if in China the consequences of their censorship are still to be seen, what Basel’s has caused already lies before our eyes: Preposterously large and dangerous exposures to what was ex-ante perceived as absolutely safe, and too small exposures to what is perceived as more risky, like loans to small and medium businesses and entrepreneurs.

And this Basel censorship has also our financial authorities flying blind, since they have no idea about what the real market rate for the sovereign debts would be in its absence.

And yet this Basel censorship is for all practical purposes ignored; which has led to it having been in many ways made even stricter with Basel III. Just as an example of it is all the silence of FT´s "without fear" journalists of FT.

Sir, I beg you, pardon my indiscretion, but could it really be that the journalists of FT are subject to something similar to what John Gapper describes the Chinese journalists to be suffering?

Basel II’s 8 percent basic capital requirement for banks allowed a 12.5 times to 1 leverage of bank equity. But it could be reduced to a minimal 1.6 percent, pushing up the allowed leverage to 62.5 to 1, if the bank exposure could be construed as guaranteed by something possessing an AAA rating.

Therefore, had bank regulators not turned the AAA-rating of AIG into an amazing magical capital requirement for banks shrinking machine; something which created an insatiable demand for AIG's credit default swaps, absolutely nothing bad would have happened, as even the whole 2007-08 financial crisis would have been avoided.

Therefore, if the AIG board absolutely must sue someone, because it feels that is the only way it can discharge its responsibilities, according to current traditions, then instead of suing those who bailed them out, they should sue those who got them in problem, the bank regulators.... and perhaps even the US tax-payers would join them in order to turn it all into a class action.

Sorry, in the current case that metaphor is not applicable. By keeping capital requirements which are much lower for bank exposures perceived as “absolutely not risky”, than for those perceived as “risky”, and regulators now even making it worse with liquidity capital ratios also based on perceived risk, the doors to the stable are kept wide open, and the few strong calm heavy horses that remain in the stable, are also being frightened into running out, which they will do... sooner or later… because even the safest haven becomes a mortal dangerous trap if overpopulated.

That might be applicable to many crisis, but not to the one that began in 2007-08. Had the regulators really looked at all the earlier crises when they designed Basel II in 2003-04, they would have ascertained that all the crises resulted from excessive exposures to assets that were ex-ante perceived as absolutely safe, but that ex-post turned out to be risky. And had they considered that they would never ever have designed capital requirements for banks which are much lower when the perceived risk is low than when it is higher, but could perhaps even have contemplated capital requirements that went 180° in the opposite direction.

John Kay is correct though when he writes: “Independence should mean regulators are free to take day to day decisions free of political interference, not that regulators are free to define policy directions for themselves.” But, the best way to ascertain all that, is for the purpose of the regulations, in this case the purpose of the banks, to be clearly defined between all parties concerned, including borrowers, and, about that there is for instance not a single word in the whole Basel framework.

January 08, 2013

Sir, Brooke Masters and Shahien Nasiripour in “Basel move aims to stoke recovery”, January 8 quote Mayra Rodriguez Valladares, a regulatory consultant, saying “This latest move shows how it is practically impossible to reform the financial sector when you have so divergent interests among politicians, regulators and bankers of the Basel committee member countries”.

Yes but if we are going to have any real recovery in the real economy then the most important actor to consult should be the small-medium businesses and entrepreneurs who need access to bank credit to ask what they think of the regulations and if these are helpful or not. And by now Basel widening slightly the requisites for belonging to the favored aaaristocracy, they have only made it harder for the excluded commoners to access bank credit.

God help us! These regulators have not the faintest understanding of the damages they are causing to our real economies trying to save the banks.

That is correct, for the banks, but absolutely not for those not included in the “broadened class of eligible assets”. For “The Risky”, the unrated or not so good rated small medium businesses and entrepreneurs, the commoners of the real economy, they will have to face even worsened conditions when accessing bank credit.

In the real economy, those perceived as more risky than others are those who on the margin are the most affected by regulations which favors the aristocracy of “The Infallible”. And this is what Basel bank regulators fail entirely to understand, probably because they have never ever left their desk and walked around in the real economy.

The taxpayers, the unemployed, especially the young, the banks,“The Risky”, of course, but even "The Infallible", the Sovereigns and Triple-A rated aristocracy, we are all going to pay dearly for having entrusted our banks to these regulators.

When are these Basel bank regulators stop concerning themselves exclusively with the health of the banks and start thinking about what the impact of their regulation has on the real economy? Do they really believe banks can survive even when the real economy sinks?

And again I must comment that the most dangerous austerity, in the US and in Europe, has nothing to do with fiscal or central bank accounts, and all to do with the foolish risk-taking austerity that, by means of capital requirements based on perceived risk, has been imposed on our banks.

That austerity signifies that those in the real economy who are the most vulnerable and dependent on access to bank credit on favorable terms, “The Risky”, are currently the ones most discriminated against by bank regulators who like overly scared nannies, insist in favoring “The Infallible”, those who least need favoring.

Before you get the regulatory distortions out of the way, the discussions, for instance of fiscal multipliers, is just a huge waste of time.

Sir, imagine a father with five sons who has declared he just loves the oldest one. Clearly the other four are not happy about that. But now the father declares that he also loves the second son. Will the three remaining unloved sons feel better or worse?

That is the question you have to answer when trying to interpret the meaning of the announced relaxation of the Basel liquidity rules for banks.

Lex in “Basel tov”, January 7, believes that this relaxation should make it “less likely do deter financing of activity in the real economy”.

Not so! The distortions in the markets in favor of “The Infallible” and against the excluded “The Risky”, will increase. And that could only worsen the conditions in the real economy, as those who represent the least risks for banks, are not necessarily the most important actors on the margin of that economy.

Let me phrase it like this: In the real economy the existence of favorable conditions is much more important for “The Risky” than for “The Infallible”

January 06, 2013

Sir, Brooke Masters, FT’s chief regulation correspondent, reports on January 6 that “Banks win more flexible rules” with respect to the assets that might count towards the liquid coverage ratio LCR, and that “the results are largely good news for bank profits because institutions will be allowed to count more, higher-yielding assets in their liquidity buffers”.

What no one seems to care one iota about is that the more you widen the definitions of “The Infallible and Included”, by allowing banks to lend to them against ultra low capital requirements, and including them in these liquidity requirements, the more you will tighten the rope around the necks of “The Risky and Excluded”, primarily all those small, medium sized business and entrepreneurs with no ratings or not so good ratings, but whose access to bank credit is still vital for the strength and sturdiness of our real economies.

Indeed these bank regulators are as dangerous as they can be. For instance, Sir Mervyn King, called the agreement “a very significant achievement [and] a clear commitment to insure that banks hold sufficient liquid assets to prevent central banks from becoming lenders of first resort.”; as if the lack of liquid assets, and not the lack of good assets, was the fundamental problem.

What was the primary cause of the current crisis? That all the investments in triple-A rated securities backed with lousily awarded mortgages to the subprime sector in the US, or the huge loans to sovereigns like Greece were not sufficiently liquid, or that they were outright bad? No doubt the later!

And why did these assets become so bad? Simply because the bank regulators whetted too much the appetite of the banks for this type of assets.

When are we going to parade these Basel regulators down Fifth Avenue wearing their well earned cones of shame and as we must do?

Never forget that in the real economy, the existence of favorable conditions, like access to bank credit, is much more important for “The Risky” than for “The Infallible”

The management of an investment portfolio always starts by ascertaining the clients risk tolerance: whether low (conservative), moderate or high (aggressive); and defining the portfolios primary investment objectives: conservation of capital, income generation, long-term capital growth or speculative capital gain. And for those most risk adverse, the investment mandates might be described in the following terms:

Risk Tolerance: Low (Conservative). The client’s principal objective is to conserve their investment by reducing the risk of loss of capital and thus volatility of portfolio. They are aware that capital risk can never be eliminated entirely, and that this type of investment will probably be subject to inflation risk. Typically, low risk strategies will comprise predominantly sovereign bonds and cash management investments, although the client may also be willing to accept some increased capital risk, for example through investment in other asset classes with higher yields and /or capital growth potential.

Primary Investment Objectives: Conservation of capital. To seek to minimize the probability of loss to principal over time by investing in relatively liquid instruments with limited price fluctuations. The client wishes to be in a position to realize the capital of his investment at any time. Products that protect notional at maturity but that may be worth less that the notional prior to maturity will not be suitable for clients with conservation of capital as their primary.

Sir Samuel Brittan knows very well that, in the long run, such risk adverse investment mandate, is doomed to dwindle the value of the portfolio into nothing.

And Sir Samuel Brittan must also know that the western world had become what it was, thanks to a lot of aggressive risk-taking searching for long term capital growth and speculative capital gains. And in its churches we could hear “God make us daring!”

But then suddenly, in June 2004, out of the blue, authorized by who knows who, the Basel Committee for Banking Supervision instructed the banks of Europe and America, with Basel II, to follow a low risk and capital conservation investment strategy. And those instructions were given by means of allowing banks to leverage immensely more their equity with exposures to “The Infallible” than with exposures to “The Risky”. And of course that zapped completely the vitality of the western economies.

I can hear the standard objection: “What do you mean Kurowski? The banks collapsed because they took on excessive risks, not because of too little risks” And again I must clarify: No! The banks took on excessive exposures to what was officially deemed as absolutely not risky, and that is an entirely different matter than taking risks. Absolutely every asset that has created the current bank problems were assets considered absolutely safe and assets and which required the banks to hold only 1.6 percent in capital or less.

And so friends, if we do not restore urgently the capacity of our banks to finance what is risky we, in the Western world, are also doomed to dwindle into nothing. And Basel III does nothing of that sort, on the contrary it also introduces liquidity requirements based on perceived risk.

January 02, 2013

Sir, Lex reports, on January 2, that now the credit rating agencies will “have to register, meet corporate governance standards and accept supervisory oversight, [which] should make it easier to sue agencies if they issue grossly negligent or deliberately erroneous ratings”.

And I just have to ask: And so now, when we are supposed to trust the credit rating agencies even more than before, something which can only mean digging ourselves deeper in the hole we’re in, who is going to rate the credit rating agencies’ financial capacity to make up for calamitous mistakes like the AAA ratings awarded to the securities collateralized with lousily awarded mortgages to the subprime sector in the USA?

The naïveté of our bank regulators is just mindboggling.

Tax-payers, caveat emptor, “Our banks are regulated by the Basel Committee and the Financial Stability Board"!

Sir, John Kay writes “Only fools and hedgehogs claim to know the future of complexity” January 2. And I must ask: Do you know some who, with their capital requirements based on perceived risk, have claimed to know the future of complexity more than the bank regulators and their clairvoyants the credit rating agencies? I do not!

These fools not only believed they could control the future without distorting it but they also entirely forgot that the risk in banking has absolutely nothing to do with the risk-perceptions being correct, and all to do with these being incorrect. If the regulators had only taken note of the empirical realities of all bank crises, they would have set the capital requirements for banks higher for what was perceived as “absolutely not risky” than for what was perceived as “risky”.

But what does then all that make of all those who without protesting allow these fools and hedgehogs to keep on regulating the banks using the same faulty paradigms? Since FT has not wanted to echo my arguments about the distortions produced by bank regulations, FT is actually one of those endorsing or covering up for the fools and hedgehogs in the Basel Committee and the Financial Stability Board.

That a “Black Swan” is to be blamed for the disaster? Forget it! This was all an entirely predictable and manmade disaster.

Me and my constituency!

Me and my constituency!

FT, just so that you know:

Some very few regulators thinking they were capable of managing the bank risks of the world, caused and are still causing immense sufferings, and you Sir are refusing to help holding them accountable for that.

My wicked question to FT

When do banks most need capital, when the risky turn out risky, or when the "not-risky" turn out risky? --- Yep, I think so too!

Videos: The Financial Crisis

My credentials

I have more credentials than most to speak out on the financial crisis and the subprime financial regulations having spoken out loudly about that since 1997...which could be embarrassing to “experts” with weak egos.

Most of those who think of themselves so broadminded when asking for “out of the box thinking” are so very narrow-minded they can only accept what comes, if that outside box lies “within their own small networks”.

Thank you, Martin Wolf

And on July 12 2012 Wolf also wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

And that is something that I of course also appreciate, but that yet makes me curious on why Wolf does not follow up on it.

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I don’t take comments here because I might not have the time to answer (or censor) them and I hate unanswered comments, but, if you want me to comment on something somewhere else invite me and I might show up: perkurowski@gmail.com

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Off-the-blog

One great perk I get from maintaining a blog like this is that it allows me to sustain many conversations with some great journalists who also need and wish to be kept “off-the-record” or as I call it “off-the-blog”.

Yet one wonders

Between January 2003 and September 2006, out of 138 letters to the editor that I sent to the Financial Times before I placed them on this blog they published these 15. Not bad! Thank you FT!

Unfortunately, since then and until the very last day of the decade, out of some 1.000 letters that you can find here, FT published none, zero, zilch. Of course FT is under no obligation whatsoever to publish any of my letters and of course one should not exclude the possibilities that my letters might have quite dramatically gone from bad to worse… yet one wonders.

My usual suspects are:

1. Someone in FT with a delicate ego feels his or her importance diminished by giving voice to a lowly non PhD from a developing country daring to opine on many issues of developed countries.

2. That FT has some sort of conflict of interest with the credit rating agencies that makes it hard for them to give too much relevance to someone who considers they have been given too much powers.

3. The FT establishment had perhaps decided there were only macro economic problems and not any financial regulation problems, and wanted to hear no monothematic contradictions on that.

4. That FT feels slightly embarrassed when someone repeatedly asks the emperor-is-naked type question of what is the purpose of the banks and realizing this was something FT should have itself asked a long time ago.

5. It is way too much oversight for FT to handle.

6. Or am I just supposed to be a living example of one half of the Financial Times motto, namely that of "without favour"Which one do you believe is closest to the truth?

A Blog is born

I like reading The Financial Times, or FT as it is known, and I frequently write letters to the editor and some of them that have indeed been kindly published, for which I feel thankful. But then I realized that all those letters to the editor that for reasons impossible for me to comprehend were never published, were condemned to an eternal silence not of their own fault, and so I decided to, at a marginal cost of zero, to resurrect them and keep them alive, right here.

English is not my mother language so bear with me and you’ll probably note when my letter has been published in FT by its correctness. Swedish is my mother language but I have not written anything serious in it for about 40 years and last time I tried, they just laughed their hearts out because of my démodés. Polish is my father language but, unfortunately, I do not speak a word of Polish, much less write it. Yes Spanish is my language, as I am from Venezuela and although I trust I write in it with great flair, I would still never dream of publishing an article in Spanish without having it edited by my wife.

And so friends here is my Tea with FT blog with my old and new letters to the editor. I hope you will share them with me now and again, and then again and again.

Welcome, and cheers, as I believe they say over there.

Per

PS. Just so that FT does not get too cocky and believe it is my only window to the world, I will now and again publish a letter sent to the editor of another publication.